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Exam 10: Corporations: Earnings Profits and Distributions

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Question 41

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Stacey and Andrew each own one-half of the stock in Parakeet Corporation,a calendar year taxpayer.Cash distributions from Parakeet are: $350,000 to Stacey on April 1 and $150,000 to Andrew on May 1.If Parakeet's current E & P is $60,000,how much is allocated to Andrew's distribution?

A) $5,000.
B) $10,000.
C) $18,000.
D) $30,000.
E) None of the above.

F) A) and E)
G) C) and D)

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Question 42

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On January 1,Tulip Corporation (a calendar year taxpayer)has accumulated E & P of $300,000.Its current E & P for the year is $90,000 (before considering dividend distributions).During the year,Tulip distributes $600,000 ($300,000 each)to its equal shareholders,Anne and Tom.Anne has a basis in her stock of $65,000,while Tom's basis is $120,000.What is the effect of the distribution by Tulip Corporation on Anne and Tom?

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Anne and Tom each have dividend income o...

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Question 43

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Jen,the sole shareholder of Mahogany Corporation,sold her stock to Jason on July 1 for $90,000.Jen's stock basis at the beginning of the year was $60,000.Mahogany made a $30,000 cash distribution to Jen immediately before the sale,while Jason received a $60,000 cash distribution from Mahogany on November 1.As of the beginning of the current year,Mahogany had $16,000 in accumulated E & P,while current E & P (before distributions)is $30,000.What are the tax consequences of these transactions to Jen and Jason?

An increase in the LIFO recapture amount must be added to taxable income to determine E & P.

Brett owns stock in Oriole Corporation (basis of $100,000) as an investment.Oriole distributes property (fair market value of $375,000; basis of $187,500) to him during the year.Oriole has current E & P of $25,000 (which includes the E & P gain on the property distribution) ,accumulated E & P of $100,000,and makes no other distributions during the year.What is Brett's capital gain on the distribution?

At the beginning of the current year,Paul and John each own 50% of Apple Corporation.In July,Paul sold his stock to Sarah for $110,000.At the beginning of the year,Apple Corporation had accumulated E & P of $200,000 and its current E & P is $250,000 (prior to any distributions).Apple distributed $260,000 on March 1 ($130,000 to Paul and $130,000 to John)and distributed another $260,000 on October 1 ($130,000 to Sarah and $130,000 to John).What are the tax implications of the $130,000 distribution to Sarah?

Tracy and Lance,equal shareholders in Macaw Corporation,receive $600,000 each in distributions on December 31 of the current year.Macaw's current year taxable income is $1 million and it has no accumulated E & P.Last year,Macaw sold an appreciated asset for $1,200,000 (basis of $400,000) .Payment for one-half of the sale of the asset was made this year.How much of Tracy's distribution will be taxed as a dividend?

Timothy owns 100% of Forsythia Corporation's stock.Corporate employees and annual salaries include Timothy ($300,000); Richard,Timothy's son ($80,000); Rita,Timothy's daughter ($100,000); and Sandy ($120,000).The operation of Forsythia Corporation is shared about equally between Timothy and Sandy (an unrelated party).Richard and Rita are full-time college students at a university about 150 miles away.Forsythia Corporation has substantial E & P but has not distributed a dividend for the past five years.Discuss problems related to the salary arrangement for Forsythia Corporation.

In the current year,Warbler Corporation (E & P of $250,000) made the following property distributions to its shareholders (all corporations) : $\begin{array} { l l l } &\text {Adjuted } & \text {Fair Market } \\&\underline{\text {Baris }} & \underline{\text {Value }} \\\text{Pink Corporation stock (held for investment) }&\$ 150,000 & \$ 120,000 \\\text{Non-LIFO inventory}&80,000 & 110,000\end{array}$ Warbler Corporation is not a member of a controlled group.As a result of the distribution:

Tern Corporation,a cash basis taxpayer,has taxable income of $500,000 for the current year.Tern elected $100,000 of § 179 expense.It also had a related party loss of $20,000 and a realized (not recognized) gain from an involuntary conversion of $75,000.It paid Federal income tax of $150,000 and paid a nondeductible fine of $10,000.Tern's current E & P is:

The terms "earnings and profits" and "retained earnings" are identical in meaning.

During the current year,Hawk Corporation sold equipment for $600,000 (adjusted basis of $360,000) .The equipment was purchased a few years ago for $760,000 and $400,000 in MACRS deductions have been claimed.ADS depreciation would have been $300,000.As a result of the sale,the adjustment to taxable income needed to determine current E & P is:

Silver Corporation,a calendar year taxpayer,has taxable income of $550,000.Among its transactions for the year are the following: Collection of proceeds from insurance policy on life of corporate officer (in excess of cash surrender value) $~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~$ $82,500 Realized gain(not recognized) on an involuntary conversion $~~~~~~~~~~~~~~~$ 11,000 Nondeductible fines and penalties $~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~\quad$ 44,000 Disregarding any provision for Federal income taxes,Silver Corporation's current E & P is:

At the beginning of the current year,Doug and Alfred each own 50% of Amaryllis Corporation (a calendar year taxpayer) .In July,Doug sold his stock to Kevin for $140,000.At the beginning of the year,Amaryllis Corporation had accumulated E & P of $240,000 and its current E & P is $280,000 (prior to any distributions) .Amaryllis distributed $300,000 on February 15 ($150,000 to Doug and $150,000 to Alfred) and distributed another $300,000 on November 1 ($150,000 to Kevin and $150,000 to Alfred) .Kevin has dividend income of:

Gold Corporation has accumulated E & P of $2 million as of January 1 of the current year.During the year,it expects to have earnings from operations of $1,680,000 and to distribute $900,000 in cash to shareholders.Gold Corporation also expects to sell an asset for a loss of $2 million.Thus,it anticipates incurring a deficit of $320,000 for the year.What can Gold do to minimize the amount of dividend income to its shareholders?

Falcon Corporation ended its first year of operations with taxable income of $250,000.At the time of Falcon's formation,it incurred $50,000 of organizational expenses.In calculating its taxable income for the year,Falcon claimed an $8,000 deduction for the organizational expenses.What is Falcon's current E & P?

Brown Corporation,an accrual basis corporation,has taxable income of $150,000 in the current year.Included in its determination of taxable income are the following transactions. What is Brown's current E & P for the year?

Briefly describe the reason a corporation might distribute a property dividend to a shareholder in lieu of a cash distribution.Describe the tax effects of the property distribution on the shareholder and on the corporation.

A corporation that distributes a property dividend must reduce its E & P by the adjusted basis of the property less any liability on the property.

Use of MACRS cost recovery when computing taxable income does not require an E & P adjustment.